As we approach the turn of the century, commercial banking faces some significant challenges, not the least of which is what to dO with the payment system. Nonbanks are making significant inroads into virtually every area of the business that has traditionally been the exclusive domain of banks, particularly in the payment system.
Users of the payment system are now demanding value-added products and services, ubiquitous access, increased functionality, and. access to realtime intraday payment information. The sad truth is that nonbanks are much more focused on the payment system needs of users, and banks are dangerously close to taking a perceived, if not real, back-seat position in the mind of payment system users.
Much of this condition is due simply to the way banks view the payment system.
Banks tend to view the payment system the way the power company views electricity '7' as infrastructure. When you say electricity to the power company, they think nuclear power plants, switching stations, telephone poles, and everything that delivers power up to the outlet in the wall. But when you say electricity to General Electric, they think toasters, irons, and microwave ovens -- all the things that represent value-added products and services for which users are willing to pay.
Similarly when you say "payment systems" to banks, they think infrastructure -- finality .of payment, settlement, movement of funds, liquidity, and their unique role with the Federal Reserve. But it is the nonbanks who view the payment system as toasters, irons, and microwave ovens. These nonbanks can always find a bank that will allow them to "plug in" to the infrastructure, very inexpensively and too often for free. The Federal Reserve senses no obligation to regulate these nonbanks since banks are willing to transparently stand behind ,them taking all the risk. Consequently, nonbanks are taking a leadership role in the minds of payment system users both corporate and consumer -- as the primary providers of payment system products and services. Just consider:
* The fastest-growing deployer of ATMs today is EDS - not a bank.
* ADP is the largest initiator of direct deposit of payroll - not a bank.
* The largest lockbox processor today is JCPenney - not a bank.
* Three of the top 10 credit card issuers are nonbanks.
* Nonbanks are leading in smart cards, prepaid product deployment, electronic benefits transfer, and health care.
* The leaders in establishing the information superhighway are all nonbanks.
Bank investments in technology over the last 10 years has been significant, but it has been mainly to make the infrastructure run better, faster, and cheaper -- not on toasters, irons, and microwave ovens. For all these reasons, I believe the payment system is on the verge of a major paradigm shift. Banks see the old paradigm quite clearly. But they are blinded to the new paradigm because of their past success in the old paradigm. International Business Machines Corp. is a perfect example. Many small-niche technology companies started nibbling at the periphery of IBM's huge domain. They were blinded by their success in the 01d paradigm and never saw the new paradigms coming. Today IBM seems to be successfully emerging from a metamorphosis that banks seem destined to enter.
Joel Barker, the famous futurist who has studied paradigms for corporations around the globe, says that when a paradigm shifts everyone goes back to zero, and all your successes in the old paradigm mean nothing.
Mr. Barker notes the Swiss watchmakers as a perfect example of paradigm paralysis. In 1968, the Swiss owned 80% of the world watch market. Then the Swiss themselves invented the quartz crystal, but when the researchers took the new technology to management it was rejected.
Management said, "This can't possibly be the future of watches, there are no gears or mainsprings."
The Japanese, on the other hand, took one look at the quartz crystal and 10 years' later they owned 80% of the world's watch market.
The Swiss were blinded to the new paradigm because of their success in the old paradigm. The Japanese, however, had no old "watchmaking paradigm" and therefore they saw the new paradigm quite clearly.
You can also probably imagine that the business case for the Swiss to adopt the quartz crystal was significantly more expensive than the cost for the Japanese.
The Swiss had to walk away from significant investments in the old paradigm. The Japanese did not have to walk away from anything. The result was that the Swiss were put back to zero by a paradigm shift. Their past success in gears and mainsprings meant nothing in the new paradigm.
Similarly, I believe banks will be put back to zero if they do not begin to see the new paradigms of payment systems and alternative delivery channels. Charles Dubois said, "The important thing is this: to be willing at any moment to sacrifice all you are, for all you can become."
These very words are particularly relevant to banks today. To have a significant role in the future of the payment system, banks must be willing to walk away from all the things that made them so successful in the past, and embrace the quartz crystal paradigms of toasters, irons, and microwave ovens, which will make them successful in the future.
Every bank in the country today is looking for new sources of noninterest fee income. Meanwhile, consumers and corporations alike will pay. for payment services if they are convenient, easy to use, and provide them something they want. It is the nonbanks however, that are leading in alternate delivery and creative payment Services.
In order for banks to see the new paradigms more clearly, and be willing to invest in future paradigms, they must do two things:
* Adopt a strong customer focus.
* Overcome internal fragmentation.
In the future, banks need to get closer to their customers. They need to find out what customers really need and want, where they want it, when they want it, and how they want it (and what they are willing to pay for it).
Consumers today want ubiquitous access, and corporations today have an almost insatiable appetite for more information, and real-time access to that information,
For the most part though, banks today are organized around products, not customers. Banks are focused on their infrastructure while the non-banks are focused on user's needs - toasters, irons, and microwaves. They have been automating customers, while banks have been automating branches.
Perhaps the most inhibiting factor for banks in seeing the new payment system paradigms is the way banks are organized.
Banks are extremely fragmented today in their approach to the payment system. There are a multiplicity of payment system initiatives and domains spread across the wholesale and retail bank.
Again; the structure is around products, and while there is a payment system attribute to all these products and vertical payment system domains, no one is looking horizontally through all those vertical domains at the payment system in the aggregate. No one is treating the payment system as a for-profit line of business. There is no executive vice president in charge of the payment system, or the needs of the customer segments they represent. The consequences and implications of this fragmentation are significant because they affect the way banks strategize, service customers, manage risk, design systems, and develop products.
The result of fragmentation is that everyone in the bank usually has a very myopic view of the customer's total payment system needs. Fragmentation therefore affects the way banks:
* Develop strategy. Many individual bank departments never strategize as a group. They independently develop strategies to fit their products and these strategies are often diametrically opposed.
Check managers for example, are investing in new technologies t9 process paper faster and cheaper (propagating the existence of paper), while managers of electronic banking are developing simultaneous strategies to put the "paper guys" out of business.
And even payment system products as similar as credit and debit are most often run by different management groups within the bank. The unfortunate result is that payment system strategy is not coordinated but fragmented, diverse, and focused more on internal proprietary product needs than on the customer's aggregated payment system needs.
* Service customers. Most corporate customers can call several places within the bank during the day to get a balance and often they will receive different information. Each "separate" system calculates available balance differently because the systems are not integrated.
Account officers make decisions on multi-million dollar wires, without knowledge that those same funds may have been pledged two or three different times during the day. Similarly automated clearing house and wire transfer systems are rarely if ever integrated on an intraday basis, thereby not only increasing risk to the bank but leaving customers unsure of their true cash position.
Research times in customer service are long and labor intensive because payment systems are not integrated and inquiry screens cannot give access to a customer's total, up to the minute, status.
* Design and integrate systems. If we were designing the payment system of the future, we would not have 10 or 12 systems with.separate transaction codes, networks, message formats, and settlements.
Yet today that is exactly what we have. These systems are not integrated and therefore there is tremendous redundancy and overcapacity in the payment system today.
Rather than integrate systems, more than likely most banks will approach smart cards for prepaid products as yet another new payment system, and never consider integrating it into any of the other things they already do.
* Manage risk. Because .payment systems are not integrated, and focus on accounts rather than customers, and operate with no common repository of intraday transaction activity, decisions affecting risk and credit are being made each day in every bank with limited and less than appropriate information. As a result most banks are probably unaware of the actual dollar risk they are taking each day.
* Develop new products. As stated earlier, every bank today is looking for new sources of noninterest fee income. The payment system offers a great opportunity. With a new organizational structure for payment systems, and by integrating diverse systems, a new base from which to build new products will exist. New payment system products can be focused on the real needs of customers - services they are willing to pay for.
Therefore, I believe some payment system executive should have responsibility for all payment system initiatives. There should be a payment system vision for new products and services to meet both corporate and consumer payment system needs. A single person should preside over payment system issues and be responsible' for all strategy development, all product planning, all payment system requirements, all payment system customer service, and all payment system risk management.
With a vision of the future, a single executive should have both the responsibility and authority to cause payment system initiatives to generate a significant profit contribution to the organization. These people, however, are not in abundance.
Because paradigm pioneers are usually outsiders and not people steeped in the old paradigms, the people most likely to succeed in this role will probably be found outside the banking industry.
Without a new focus and a new organization structure, payment system fragmentation and all its implications will prevent banks from viewing the payment system in the aggregate and seeing the paradigm shift that is occurring. If so, what happened to the Swiss, and the railroads, and the U.S. automakers - and what is happening to IBM, will likely happen to banks. There is no tomorrow, it is now or never.
Mr. Whiite worked with Furash &Co., on the Bankers Roundtable payment systems report.
